EU “Fit for 55”: Decarbonising Gas Markets
On 15 December 2021, the European Commission took another major step towards accomplishing its ambitious goal of making Europe the first climate neutral continent by 2050, as enshrined in the EU Climate Law, by adopting a second package of “Fit for 55” proposals amending the EU’s climate, energy, land use, transport and taxation policies with a view to reducing net greenhouse gas (GHG) emissions by at least 55% by 2030 (the “December package”).
This blog post analyses the Commission’s proposal to recast the Third Gas Directive and to recast the Third Gas Regulation. The proposals are accompanied by a Q&A, Factsheet, and press release.
For more information on the rest of the December package, have a look at our overview blogpost and our Fit for 55 microsite.
Overview
Today, fossil (mainly natural) gas accounts for about 95% of gaseous fuels in the energy mix. By 2050, the Commission wants renewable and low-carbon gases combined to cover two thirds of gaseous fuels in the energy mix and natural gas in combination with carbon capture, usage or storage (CCUS) technology to cover the remaining third.
Unlike the sister framework for power markets, which received a substantial overhaul with the Clean Energy Package in 2019, the European gas market regulation has remained largely unchanged since 2009. With its focus on natural (methane) gas and LNG, it was no longer fit for purpose in view of the EU’s Green Deal objectives and decarbonisation agenda.
In a nutshell, the proposals seek to achieve the following objectives:
- Facilitating the integration of renewable and low-carbon gases (including hydrogen) into the natural gas system and shifting away from natural gas.
- Establishing a regulatory framework for the large-scale deployment of hydrogen, including the repurposing of existing gas pipelines and the construction of dedicated hydrogen networks by regulated operators, based on objective and non-discriminatory third-party access (TPA) against payment of pre-approved and published tariffs, unbundling, and transitional measures until the end of 2030.
- Encouraging coordination and integrated network planning for power, gas and hydrogen between Member States, regulators and operators on all levels, including the creation of a European Network of Network Operators for Hydrogen (ENNOH), responsible amongst other things for drafting (dedicated) hydrogen grid codes, and the extension of the EU DSO entity to operators of gas distribution systems;
- Empowering and protecting consumers and customer participation to retail markets, largely mirroring similar provisions already introduced or proposed for the power markets.
- Improving the resilience of the EU’s energy system, security of supply and price control, including a more strategic approach to gas storage, increased cyber security and a voluntary joint procurement scheme for strategic gas reserves.
The Details
What does it mean in practice?
The changes, if approved, will impact a variety of players across sectors, primarily in the industry but also smaller energy users, communities and, not least, the network operators. The focus on third-party access, coordinated network planning and a much deeper market integration for all participants, across retail, wholesale and balancing markets and regardless of where they are connected to the system, will also present great opportunity. Consumer empowerment and protection is being brought in line with what already exists for the power markets, which may in the medium to long term generate significant cost savings for combined power and gas (and hydrogen) suppliers.
An argument has long been made for combined hydrogen and gas operators to spread their risk and the (initially) high cost of developing a hydrogen grid over more users through a joint RAB for those activities, but the Commission has decided not to go down that road. This way it has presumably wanted to limit the impact of the hydrogen boom on a shrinking base of remaining natural gas users for many years to come, but it may have an adverse impact on the uptake of hydrogen development it is envisaging. The possibility of tariff discounts could compensate some (but certainly not all) of the detrimental effect of high hydrogen tariffs, which will no doubt be a consequence of the split RAB approach.
What’s next?
The proposals are currently open for public feedback (Directive | Regulation) and will then follow the ordinary legislative procedure (Directive | Regulation), where they will be considered and negotiated by the Council (i.e., the Member States) and the European Parliament. This is likely to take up to a year and a half. The Fit for 55 proposals are interconnected, but as we flagged in one of our previous posts, the timing and fate of each proposal in the Fit for 55 package is to a large extent independent of the other proposals in the package.
The Regulation is to apply as of 1 January 2023 and will be directly applicable in each member state. After the Directive’s entry into force (20 days after its publication), the member states will have time to transpose the new rules into national law until January 2023 , by which time the current Gas Directive will be repealed.
